UK Official Says Modi Government's Decision To Not Support FDI In Multi-Brand Retail Should Be Respected

India's latest government led by Narendra Modi's Bharatiya Janata Party, or BJP, which swept to power with promises of economic reform, is considering banning foreign direct investment, or FDI, in the lucrative multi-brand retail sector to protect the interests of local entities, and its decision should be respected, a British official said Wednesday.

The comment by Scott Furssedonn-Wood, the British Deputy High Commissioner for Eastern India, was in reference to a statement on Tuesday by the newly-appointed Commerce and Industry Minister Nirmala Sitharaman who said that the ministry will take a calibrated approach to the overall FDI issue but foreign direct investors in multi-brand retail are unwelcome.

“This (FDI in multi-brand retail) is a decision of an individual country and we respect it,” Furssedonn-Wood said, according to The Hindu, a local newspaper.

Sitharaman said Tuesday, according to Economic Times, a local newspaper: "At this stage the party position is very very clear. We have explained about FDI in multi-brand retail (MBR) that it probably is not best opened up now because medium and small sized traders or small farmers have not been adequately empowered .. if you open up the flood gates of FDI in MBR, it may affect them."

The minister's comments signal an about-turn on FDI policy for the sector, after the previous Congress-led government decided in September 2012 to allow up to 51 percent FDI in multi-brand retail, raising the hopes of foreign players such as Wal-Mart (NYSE:WMT), IKEA and TESCO (LON:TSCO), all of whom have waited years for access to the country's $500 billion retail market.

While the ambiguity in the policy language has kept most aspiring foreign retailers away, India is also seen as an extremely difficult market because of the popularity of local mom-and-pop stores, a lack of supply-chain infrastructure and a convoluted tax system. A report from CRISIL released Wednesday, the local arm of Standard & Poor's, showed that India’s top food retailers incurred losses worth $2.2 billion in the fiscal year ending March 2014.

“These losses reflect the challenges in the food and grocery retailing vertical. Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs. The business also has the lowest gross margins in retailing, which leads to longer gestation periods. Players, therefore, need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to achieve critical mass,” Ramraj Pai, President - CRISIL Ratings, said in a statement.

However, Wal-Mart, which ended its partnership with the Bharti group, to strike out alone plans to open 50 stores in the next five years while IKEA plans to invest about $2 billion in India. London-based Tesco has been cleared by the previous government to begin operations while French major Carrefour (EPA:CA), which entered India through its wholesale outlets, decided to pull out following the BJP's victory in the national elections.